Private equity giants are starting to emulate Warren Buffett

Bloomberg, screenshotDavid Rubenstein, Billionaire private-equity the founder and co-CEO of The Carlyle Group

Private-equity giants want to play the long game.
Several big firms are raising new buyout funds that can invest in companies for up to 20 years — more than twice the period they have typically held onto investments in the past.
The long-term horizon means investments and returns should be less volatile than usual. It also means returns will probably be lower, but the funds plan to charge lower fees to offset this.
This long-term thinking among private equity executives takes a page from billionaire investor
Warren Buffett, who had said his “favorite holding period is forever.” With piles of cash and publicly-traded shares, Buffett’s vehicle, Berkshire Hathaway can acquire companies without raising funds.

“I don’t know why Warren Buffett should be the only person who can have a 15-year, 14% sort of return horizon,” Joe Baratta, head of private equity at Blackstone Group, said at the Super Return private equity conference in February 2015.

Carlyle Group, the world’s second-largest private equity firm, said Wednesday that it has raised $3.6 billion for Carlyle Global Partners (CGP) — a longer-life fund that has been around since 2014.

CGP has a “flexible investment mandate, is sector- and geography-agnostic, and has limited need for nearer-term liquidity events,” according to the company statement.

Since 2014, CGP has invested $1.1 billion in four companies, which includes corporate jet financing firm Global Jet Capital and hospital operator Schoen Klinik. The firm can invest more than $500 million per deal.

“We have already made three investments and will fund a fourth in November. Each is emblematic of the CGP mandate to invest long term alongside owners and management teams in sectors and geographies that complement Carlyle’s private equity funds,” Eliot Merrill and Tyler Zachem, co-heads of CGP, said in a release announcing the fundraising.

The new funds allow private equity firms to pursue deals that don’t fit with their main buyout funds and hold on to successful portfolio companies longer. Only buyout funds with over 10- and 15-year investment horizons have outperformed the stock markets in the US, Bain & Co. found in a 2015 research report.

By charging less, private equity firms can justify holding assets longer and settling for lower returns, according to the report. This could appeal to institutional investors — think sovereign wealth funds and pension funds — that are willing to lock up their money for a longer period and vying for market-beating returns amid sluggish economy and growing uncertainty.

Blackstone expected to raise about $5 billion for its first “core” private equity fund, with a holding period that doubles the typical three-to-five-year holding period, Bloomberg reported in June. The fund will back bigger, more established and less risky firms than most buyout targets, according to the story.

CVC Capital Partners, European’s largest private equity firm, has also set up dedicated long-term funds.